South African bank regulation - Basel III, default risk, and contagion

Abstract

This paper sets out to ascertain the appropriateness of the Basel III macro-prudential policy mechanisms as South African (SA) bank distance-to-default (DTD) determinants. Using a hybrid model embedded within a linear dynamic panel-data estimation technique, the author finds that whilst controlling for both macro- and micro-economic bank influences, the predictors of the DTD for the 5 largest SA retail banks over the period of 2004–2015 include: the Basel Tier 1 capital ratio; the liquidity coverage ratio; the net stable funding ratio; the United States DTD pre-, mid- and 3 year post-crisis interaction terms; simple leverage ratio; the banks’ market betas; and the South African Reserve Bank (SARB) repo rate. Of the variables which found no support as predictors of the DTDs, were the gross market value of derivatives and liquid assets. Accordingly, these findings endorse the SARBs adoption of the Basel III policy recommendations for the SA banking context.

Download SA-TIED Working Paper #43